Accounting for Leases & Software Subscriptions

Scope

This policy applies to all leases and software subscriptions for which the University has the right to use an asset used in operations (University is the lessee). In addition, it applies to all leases for which the University is the owner of an asset and leases the asset to parties outside of the University (University is the lessor).

Reason for Policy

The policy provides guidance as to the application of GASB for the University to ensure compliance with external reporting requirements for leases and software subscriptions.

Policy Statement

The Governmental Accounting Standards Board (GASB) issued Statement No. 87, Leases, and GASB 96, Subscription-Based Information Technology Arrangements, which establishes a single reporting model for lease and IT subscription accounting. GASB 87 changes the definition of a lease to eliminate the "capital" and "operating" differences.

All leases meeting the GASB criteria require lessees to recognize a lease liability and intangible Right-of-Use asset and lessors to recognize a lease receivable and a deferred inflow of resources.

Examples of nonfinancial assets include buildings, land, vehicles, and equipment.

All contracts that contain a lease of an asset or IT subscriptions should be reviewed and reported as a Right-to-Use (ROU) asset if it meets the criteria outlined in this policy. The University should consider the following when determining whether a contract that is reportable as a Right-of-Use asset:

• A contract is in place that contains the right to use the underlying asset as specified in the contract
• Contains a specified period of time
• The transaction is exchange or exchange-like, meaning both parties in the contract receive or give up equal value or something more than a nominal amount is exchanged.

The following thresholds should be considered when recording a lease of software subscription for GASB reporting as an asset and associated liability. 

• Land, buildings and equipment (excluding copiers and vehicles) are recorded regardless of the dollar value of the contract.
• Copiers and vehicles contracts of a total value (including optional renewals) of $50,000 or more are considered reportable as a lease.
• IT software subscriptions contracts of a total value (including optional renewals) of $500,000 or more are considered reportable as a software subscription.

Right-of-Use in a contract does not have to include 100% access to the asset to qualify as a GASB reportable lease. A Right-of-Use lease also includes use for portions of time, such as certain days of the week or hours as outlined in the contract.

A contract may contain multiple components. Some of which may meet the definition of the lease along with some that may not. All contracts should be examined to determine if a lease is embedded into a contract and requires reporting, prior to the first payment due.

Leases must be recorded at the total cost of the lease net of interest expense (the present value at the inception of the lease). In the absence of a stated interest rate in the contract, the University will use its borrowing rate, as calculated by the Office of Treasury. The borrowing rate will be updated on a fiscal year basis and applied to all new leases entered into during the fiscal year. If there is a significant change in the rate, it may be updated and applied to leases on a more frequent basis as determined by the UM System Controller’s Office. Significant is defined as a change in greater than 1% and will be evaluated by the Controller’s Office with a new bond issuance.

Exclusions
Certain contracts are excluded from the Right-of-Use criteria of reporting. Those exclusions are as listed below:

• Contract criteria should not be applied to biological assets, inventory, supplies, service concession arrangements, assets held as investments or internal leases.
• Short-Term contracts that have a total non-cancellable term equal to 12 months or less, including renewals, should not be reported as a lease or subscription.
• Contracts containing leases that transfer ownership at the end of the term should be treated as a financed purchase rather than a Right-of-Use transaction.
• Contracts that are cancellable by either party at any time for any reason, including the notice period.
• Payments that are variable in nature should be excluded from the asset and liability calculation.  If a minimum payment is required in the variable calculation, the minimum must be recorded as part of the asset and liability.

Approvals
All leases and contracts containing a lease must be approved by the campus Chief Financial Officer prior to execution. These approvals apply to both equipment and real estate leases regardless of cost or GASB reporting requirements.  Software subscriptions approval process must follow Policy 12004 - Information Technology & Telecommunications Purchases. 

Lessee Accounting (Payables)
ROU Assets should be recorded separately from University owned capital assets along with a lease liability when the University is the lessee. The value of the asset will equal the present value of all lease payments plus any prepayments, initial direct costs, and software implementation costs that were necessary to place the asset into use. ROU Assets should be amortized over the term of the contract in which the right to use the asset is granted. Any extensions to the lease term must also be applied to the ROU asset.

Software subscription implementation costs are broken down into three stages.  Each stage is outlined below with how those costs are recorded.

• Preliminary Project Stage – includes costs from the conceptual formulation and evaluation of alternatives, the determination of need and the final selection of alternatives for the software subscription. Costs in this stage are expensed as incurred.
• Initial Implementation Stage – includes ancillary charges related to the design of the chosen subscription, such as configuration, coding, testing and installation.  This stage is completed when the software subscription asset is placed into service and is to be included in the asset value recorded for the software subscription ROU Asset.
• Operation and Additional Implementation Stage – includes maintenance, troubleshooting, and other ongoing costs to access the software.  These costs are expensed as incurred unless the cost is associated with modifications to the subscription software, which would be included in the capitalization of the ROU Asset.

An annual inventory is required for ROU assets and shall follow the same process as University owned capital asset inventory controls.

Automated Payments
A software system that automatically generates vouchers for fixed lease payments will be utilized for reportable leases. As such, fiscal approvals will be obtained prior to the commencement of the lease. For equipment leases, this will occur through the requisition process. On real estate leases, the UM System Real Estate Office will obtain the approvals through the use of a lease form. Once all approvals are obtained and the lease contract is fully executed, the lease will be entered into the system for final sign off by the UM System Controller’s Office. Following approval, scheduled payments will be generated automatically as set forth in the payment terms of the contract.

Departments must review their funding chartfields timely to ensure proper funding streams are being used. In addition, departments must communicate any changes to the contract terms to the appropriate UM System Office as soon as the changes are known.

Reasonably Certain
Lease terms must include all renewal options and/or purchase options that are reasonably certain to be exercised. Each department that enters into a reportable lease is responsible for indicating whether each applicable option is Reasonably Certain of being exercised. The University has set the Reasonably Certain threshold at 80% likelihood of occurring. Changes to the decision options changing over or under the 80% threshold, should be communicated to the applicable UM System Office.

All factors should be considered when the determination is made on whether an option is likely to be exercised. This could include but is not limited to: economic factors such as penalties or incentives, uniqueness of the asset, costs of moving, or costs of disruption to operations.

Lessor Accounting (Receivables Leases)
A lease receivable and a deferred inflow of resources will be recorded when the University is the lessor. The receivable is equal to the present value of lease payments expected to be received during the lease term, reduced by any provision for estimated uncollectible amounts. Non-operating lease revenue and interest revenue will be recorded on a straight-line basis over the term of the lease. As the lessor, the University will continue to recognized the asset underlying the lease in accordance with the Capital Assets and Depreciation policies.

Automated Invoices
A software system that automatically generates invoices for fixed lease payments will be utilized for reportable leases. Approvals for entering into the lease and funding stream will be obtained prior to lease commencement. Once all approvals are obtained and the lease contract is fully executed, the lease will be entered into the system for final sign off by the UM System Controller’s Office. Following approval, scheduled invoices will be generated automatically and sent to the Customer.

Departments must review the invoice chartfields timely to ensure proper funding streams are being used. In addition, departments must communicate any changes to the contract terms to the appropriate UM System Office as soon as the changes are known.

Definitions

Lease – a contract that conveys the control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction.

Reasonably Certain – a high threshold of probability that must be met to include renewal or purchase options in the measurement of a lease assets and lease liabilities.

Right-to-Use (ROU) Asset – lessee has the ability to use an asset owned by another party over the life of a lease and title remains with the outside party.

Software Subscription – a contract where the University has the ability to use another party’s software asset, either alone or in combination with tangible capital assets over the life of the contract and title remains with the outside party.

Short-Term Lease – a lease that, at the commencement of the lease term, has a maximum possible term under the contract of 12 months (or less), including any options to extend, regardless of the probability of being exercised.

Fixed lease payment – contractually required payments outlined in the lease contract that are fixed in nature, including payments that have escalations, such as Consumer Price Index (CPI) or stepped increases. Payments that are based on future performance are not fixed payments.

Accountabilities

UM System Controller’s Office:

• Establish and maintain policy for ROU assets and lease revenue.
• Make the final determination on whether a lease or software meets the GASB reporting guidelines.
• Maintain lease software and release automated fixed lease payments and invoices.
• Reconcile lease administration software to the general ledger.
• Initiate ROU asset inventory annually

UM System Procurement/MUHC Supply Chain:

• Determine whether a lease or software is reportable
• Gain necessary approvals for lease contract and payments
• Enter and maintain leases for equipment, including processing lease modifications and terminations timely.

UM System Real Estate Office:

• Determine whether a lease is reportable
• Gain necessary approvals for lease contracts and payments
• Enter and maintain leases for buildings, space, and land, including processing lease modifications and terminations timely.

UM System Treasurer’s Office:

• Calculate the University’s borrowing rate on a quarterly basis.

Campus Business Services/Contracts Offices:

• Report contracts that may contain a lease to the System Real Estate or Supply Chain offices for evaluation.

Campus and Hospital Finance:

• Ensure proper financial approvals are obtained on lease contracts.
• Review rent and other related accounts for potential leases.
• Review leases in portfolio for asset impairments.
• Certify lease accuracy during annual sub-certification process.
• Review collections on receivables leases and determine collectability
• Obtain CFO approval when applicable

Campus Departments:

• Responsible for following purchasing and leasing contract guidelines.
• Must monitor financials closely to ensure proper payments/receipts recording for leases including but not limited to: proper chartfields, amounts, and alignment with lease terms.
• Monitor automated fixed lease payments and pay any non-fixed payments due.
• Reexamine Reasonably Certain determination on a regular basis and report any changes in a determination.
• Communicate changes to lease terms, funding, etc to the appropriate UM System office in a timely manner and must be prior to the effective date of such changes.
• Must complete annual inventory of ROU Assets and validate that the University still has possession of the asset.
• Where the University is the lessor, monitor lease invoices and ensure payments are matched to appropriate invoice created and non-fixed lease components are collected from the Customer.

 

Additional Details

Forms

 

Related Information

Equipment, Leases, and Rentals | University of Missouri System (umsystem.edu)

Capital Assets | University of Missouri System (umsystem.edu)

Depreciation | University of Missouri System (umsystem.edu)

Procurement Authority | University of Missouri System (umsystem.edu)

70.050 Authorization of Real Estate Sales, Leases, Licenses, Easements, Right-of-Way, and Mineral Rights | University of Missouri System (umsystem.edu)

80.010 Procurement | University of Missouri System (umsystem.edu)

Policy 12004 - Information Technology & Telecommunications Purchases

History

This policy was revised effective July 1, 2023 to include IT software contracts under GASB 96 as well as establishing reporting thresholds for copiers, vehicles and IT software for purposes of GASB reporting only.

Procedure